Today the SEC announced settled charges against Merrill Lynch, Pierce, Fenner & Smith, Incorporated and two other self-reporting advisory firms and ordered more than $139 million to be returned to investors as part of the agreement. According to the Order, against Merrill Lynch, the proceedings arise out of breaches of fiduciary duty and inadequate disclosures in connection with its mutual fund share class selection practices and the fees it received. During the relevant period, Merrill Lynch purchased, recommended, or held for advisory clients’ mutual fund share classes that charged higher fees instead of lower-cost share classes of the same funds for which the clients were eligible. Mutual Funds typically offer investors different types of shares or shares classes. Each class represents an interest in the same portfolio of securities with the same investment objective; making the fee structure their main difference. For instance, Institutional shares, or Class I shares typically pay lower annual fund operating expenses over time, equaling to higher returns than other classes that charge 12b-1 fees. The recurring 12b-1 fees are included in the total annual fund operating expenses and deducted automatically from the mutual funds’ assets. These recurring fees are paid generally to the broker-dealer that distributed or sold the shares, Merrill Lynch, in this case. Additionally, the SEC found that Merrill Lynch failed to disclose these conflicts of interest relating to its receipt of the fees and/or its choice of mutual fund class that would pay such fees.
The order states that they are censured, and that they cease and desist from future related violations and that they pay disgorgement and prejudgment interest totaling over $425,000 and that they comply with certain undertakings, including returning the money to investors. It’s worth noting that, Merrill Lynch, self-reported to the SEC the aforementioned violation.